Job Repatriation

Today I had the opportunity to talk with the CFO of a relatively small (less than $1.5 billion of sales) American light industrial company. This company is at the forefront of one of the challenges of our generation - clean water. We talked about business in the slowing economies of North America and Europe, and while there are certainly short term challenges, this is a great business that I have no doubt will do well in years to come (it a low cost producer, has leading market share in its products, and serves what will be a growing market for foreseeable future).

What struck me most in our conversation, though, is that this company is planning to bring back manufacturing jobs from China to the United States. Talk about a paradigm shift! For all we hear about outsourcing jobs overseas and China taking jobs from America this company is talking about the exact opposite. Why are they doing this? The answers are surprisingly simply: the strength of the RMB, labor cost inflation in China, and taxes in China. Without any government intervention, this company is making an economic decision to bring manufacturing jobs back the America. Further, this CFO cited a labor walk out and eminent domain problems in China.

So this is a new paradigm and could be the start of a new trend. As developing economies turn into developed countries they are encountering the same issues that faced the workers of the Industrial Revolution in the West over a hundred years ago. This also got me thinking that if corporate taxes were eliminated or vastly reduced in the United States, it would (contrary to standard liberal talking points) actually create jobs right here at home by attracting our own companies to repatriate manufacturing. It would also attract foreign companies to set up businesses to take advantage of our productive workforce, legal system, and relatively low inflation. We have already seen the latter from the transplant auto plants of the Japanese auto manufacturers and BMW, but this is the first time I have heard of repatriation of manufacturing by an American company that had gone overseas. We can accelerate this shift if we eliminate or lower corporate taxes.

This company is still planning on growing in China, but it will use its expertise to manufacture in China to serve the domestic Chinese market and not to export back to the United States. Another company I talked to is already doing this, and it is in fact exporting key components manufactured in the United States for final assembly in China to be sold in China. I think we will see this shift take place at an even greater rate over the next 10 years as the American consumer slows its credit-fueled shopping binge for soft goods and electronics and as China demands more technologically advanced hard infrastructure and industrial products from the West.